When an employee has an employment contract, whether express or implied, that contract contains an unspoken covenant of good faith and fair dealing. This means that an employer owes an employee a duty to act in good faith and to deal fairly with him/her. The covenant goes both ways, meaning the employee has the same duty to the employer.

This construct arose because, in the past, one party often held the position of power in the contract negotiations. This is true in most employment situations, because in almost every state in the U.S., employment is considered to be at-will, meaning an employee can be fired at any time without notice. There are a few exceptions to at-will that may apply, and the covenant of good faith and fair dealing is one of these.

What Does it Mean to Act in Good Faith and Deal Fairly with an Employee?

The duty an employer owes an employee with an employment contract requires them to treat him/her fairly. If the employee has a written employment contract, it likely has provisions as to under what circumstances the contract can be terminated.

Acting in good faith means that the employer would honor these provisions and not terminate the contract for other reasons. If the employee's contract is implied (in the absence of a written agreement), the covenant of good faith and fair dealing requires the employer to only fire the employee when they have good cause.

Not every employment agreement can include every aspect/reason for hiring. The agreements don’t have to include everything. For example, an employee joined the company under the idea that they would benefit from great medical benefits or at-home flexibility, but then the benefits are cut or the employee is fired for wanting to use them.

This would be a clear violation of the covenant of good faith and fair dealing, as the employee was recruited and turned down other good opportunities for this position on a promise. The employee promised to stay with the company for as long as they could use the benefits, but when they attempted to use it, they were fired.

What is a Good Cause to Fire an Employee?

In order to have good cause, an employer must have a legitimate reason for firing the employee. This usually means that the reason must be job or business related in some way. For example, if an employee brings a gun to work an employer has good cause for firing him/her.

On the other hand, the employer doesn't have good cause to fire an employee because he has illegitimate children. Other examples of good cause include:

  • Poor work performance (such as low productivity, showing up late, missing meetings);
  • Harassing other employees;
  • Threats of violence;
  • Stealing from work;
  • Insubordination;
  • Revealing trade secrets; and/or
  • Lying to supervisors and other forms of dishonesty.

It’s also acceptable to fire an employee because of downsizing, or due to financial difficulty. While it is also fair to tell the employee, before hiring, that there may be a chance of economic trouble, the employer doesn’t have an obligation to warn the potential employee of financial trouble.

There is also a balance between good faith and fair dealing to the employee, and not sharing company secrets or betraying any confidences that are private in your company’s structure. 

Other Tips about the Covenant of Good Faith and Fair Dealing

It is important to note that this covenant applies to all aspects of employment, not just terminating a contract. For example, if there are provisions as to pay or benefits in a written contract, an employer must honor those as well as any other provisions. It takes serious wrongful conduct to violate the covenant. Some examples include:

  • Firing an employee just before his/her pension vests so the employer doesn't have to pay;
  • Making up reasons for firing an employee when just trying to replace the employee with cheaper labor; and/or
  • Firing an employee in order to prevent him/her from collecting commissions.

When firing an employee, honesty is the best policy. But it’s also key to follow your company’s protocol set by the HR Department. This may include an email, paperwork, etc. that all must be filed and followed in order to make sure that the right steps were taken and to avoid a wrongful termination claim.

I'm Confused about My Duties under the Covenant of Good Faith and Fair Dealing, Do I Need a Lawyer?

An employment lawyer near me can inform you of what duties you owe your employees and what rights you have as well. Because employment law is always changing, your duties change as well. A knowledgeable employment lawyer will be up to date on the latest laws and can advise you how to best handle your situation.